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The Law Commission issued a consultation paper on the ‘Reform of Family Laws’, on August 31, 2018. In it, the Law Commission has recommended for the abolition of the Hindu Undivided Family (HUF) as a tax unit. This suggestion, if implemented, will have huge and long-term implications for tax payers who are members of a HUF.
Historical perspective of the HUF
Earlier, many generations used to share food and were living under a common roof. In most of the cases, the family would own a business, income wherefrom was meant to be used for maintenance and various needs of its members. The British recognised this concept of joint family for the purpose of income tax laws and introduced the HUF as an income tax entity, under the Income Tax Act, 1922. This legislation has been replaced by the current Income Tax Act, 1961, where the HUF continues to be a separate and distinct tax entity.
Reasons for the Law Commission to suggest abolition of the HUF as a tax entity
The expert committee on direct taxes, popularly known as Wanchoo Committee, appointed for suggesting reforms in tax laws, had observed that the HUF as tax unit, was used for tax evasion. However, there is difference between tax evasion and tax avoidance. Tax evasion is illegal and deprives the national exchequer of its legitimate tax dues, whereas, tax avoidance is the practice of availing of tax-saving avenues that are legitimate and within the law. For example, taking rent for your let-out property in cash from a tenant and not disclosing it in your income return is tax evasion but buying a property jointly with your spouse with a joint home loan, to avail of the tax benefits under Section 24(b) and 80C, is tax avoidance. This arrangement will reduce your tax liability, as both of you will be able to claim these tax benefits and thus, will be able to reduce your overall tax outgo as a unit. This is perfectly legitimate. Likewise, availing of the benefits of basic exemption, as well as various tax deductions by a HUF, under Section 80C, 80D, 80DDC, etc., are legitimate and are very much permitted by the law of the land.
What should home owners do now?
Before you contemplate taking any action, in view of the suggestion of the Law Commission, you should appreciate that the law-making process in our country is very long and it may take years or even decades, for a suggestion to be made into law. The Law Commission has just issued a consultation paper, on which stakeholders are free to give their comments and suggestions. After taking into account the comments and suggestions received, the Law Commission will send its recommendations to the Ministry of Law and Justice, with a draft of the legislation. The Ministry of Law and Justice may decide to accept the recommendation, or decide otherwise. In case the recommendations find favour with the Ministry, the bill, with or without modifications, is introduced in both the houses of parliament. The bill may be passed by parliament, or it may be referred to a select committee, for elaborate deliberation.
The bill becomes a law, after it is passed by both the houses of parliament and receives the president’s assent. The parliament may also decide not to pass the law. So, there is a long journey, which a proposal has to undergo, before it is enacted as law. Consequently, those of you who own any property in the name of a HUF, do not have to do anything right now and can continue to enjoy the benefits available to a HUF.
What will happen if and when the HUF is no longer a tax entity?
The HUF as a tax entity is not recognised in the state of Kerala, by virtue of the ‘Kerala Joint Hindu Family System (Abolition) Act, 1975’, from 1976. So, any law which provides for abolition of the HUF as a tax unit, may have provisions that are similar to those contained in the Kerala legislation. It also has to provide for the rights of members in existing properties, etc. The Kerala Law provides that after passing of this law, all the properties of the HUF shall be deemed to have been divided among all its members, whether the member is entitled to ask for such partition or not. On and after coming into effect of this law, all the members will hold the property as tenants in common and therefore, would be treated as full owner of the part which comes to them on partition of the HUF property. It may be noted that only a coparcener is entitled to ask for the partition and as and when a partition takes place, all the members, whether coparcener or not, get their share in the HUF property.
So, all the members of the family will become individual owners of their share in the property, which comes to them due to such deemed division of the property. After introduction of the law, the respective members will have to include such income in their income tax returns.
Moreover, the Kerala law provides that after passing of the law, no member of the family will be entitled to ask for any share in the ancestral property, by virtue of having been born in the family of that ancestor. So, all the ancestral properties will become individual properties of the person who inherits it.
Other implications under income tax laws
If the provision for the abolition of the HUF and deemed division of immovable property are introduced, it will have various other implications as well, for the people who get any share in a house, presuming that the other provisions of the existing Income Tax Act remain the same.
Firstly, by virtue of Section 26 of the Income Tax Act, the co-owners of the partitioned HUF property shall be treated as absolute owners of their share. As the benefit of self-occupied property is available with respect to only one property, such persons will have to offer notional income for the share in such property, in case the same is not actually let-out and is used by other family members for their residence.
Likewise, Section 54F provides that the long-term capital gains exemption, in respect of any asset other than a residential house property, by investing the consideration in another residential house, can only be availed if you do not own more than one house (except the one which is being bought) on the date of sale of such long-term capital asset. As explained, the share in the HUF, howsoever miniscule it may be, will be treated as a house and accordingly, you will not have this avenue for saving long-term capital gains.
(The author is a tax and investment expert, with 35 years’ experience)